Wisconsin’s Budget Problems

This is going to be a long post, but I’ve been asked by a fair number of former students and friends, from both sides of the political aisle to comment on what is happening in Wisconsin.

First, lets look at the budget problem. The State of Wisconsin has had a structural deficit since days of Tommy Thompson (current issues here). They are largely the result of large increases to K-12 spending, tougher sentencing laws (map here), and tax cuts in early 2000. To be sure, there are other factors (such as rising healthcare expenditures) contributing to our current problems. But those three changes were the genesis.While they did occur under a Republican Governor, every Governor since has kicked the can down the road. And now the healthcare expenditures are starting to bite as well. Doyle was the most creative in using temporary tricks and one time money to close the gap. Even raiding a fund we will have to pay back. Andrew Reschovsky discusses efficient tax policy and proposes some tax altering policies which might be used to close the gap. If you are interested in understanding why Wisconsin taxes are higher than other states, read this excellent piece by Todd Berry and Dale Knapp. Higher taxes are in part to fund higher spending, and in part due to less efficient taxing. The reasons for the higher spending are clearly outlined, in the piece but include paving roads no one else paves, K-12 benefits packages, and subsidizing higher education tuition. (although this last one has obviously declined substantially recently).

Looking more specifically at the current budget repair bill. It appeared it was only made necessary by the tax expenditures (yes that is spending too) that happened at the end of January. Read Bob Lang’s Legislative Fiscal Bureau’s (LFB) Jan 31st report.

Our analysis indicates that for the three-year period, aggregate, general fund tax collections will be $202.8 million lower than those reflected in the November/December reports. More than half of the lower estimate ($117.2 million) is due to the impact of Special Session Senate Bill 2 (health savings accounts), Assembly Bill 3 (tax deductions/credits for relocated businesses), and Assembly Bill 7 (tax exclusion for new employees).

Tax expenditures are bad public policy and bad tax policy. However, closer inspection reveals that in fact the tax expenditures affect the 11-13 budget only. Interestingly the tax expenditures add up to about 140 million, which is 50% of the projected 11-13 savings from higher health and pension contributions from state employees. Money is fungible, but passing tax spending, then three weeks later screaming about rising deficits, strikes me as a little intellectually dishonest, or at least inconsistent.

On the question of public sector compensation. Yes, my non-wage benefits and the non-wage benefits of all state employees are very good. And they will still be very good even after the proposed concessions. But when making comparisons you can’t merely look at non-wage benefits without considering the wage side as well. Total compensation is the economically relevant concept. As this Heritage document explains, it is about the incidence.

Incidence of labor Taxes. The relatively elastic demand for labor, coupled with the assumption of a highly inelastic supply of labor, means that labor bears most of the initial economic incidence of taxes on labor income. It has become common to assert that all taxes on labor income fall on the worker, including the employer’s share of the payroll tax, the employers; share of the payroll tax, the unemployment compensation tax, and the portion of the income tax that falls on wages and salaries.

In other words, labor bears the burden of income taxes, and both sides of the payroll tax, along with any benefits. So we should compare total compensation, and not look merely at pieces of the compensation pie. It is akin to watching someone try to lose weight. What matters is total calories consumed. If you merely look at the breakfast someone has consumed you might be led to the wrong conclusion. They might have a large breakfast, but a far smaller lunch and dinner. There are other reasons simply comparing benefits is problematic, and challenging. The Minneapolis Fed talks about the case of pensions here. And by the way, Wisconsin pensions are not underfunded like Minnesota’s.

One of the challenges in the discussion is that talking about public versus private sector includes large swaths of very different people, different jobs, different skills, different education. So saying things like “public sector workers are over paid”, are useless statements, just like saying public workers are underpaid is useless. That is true for some and not true for others. Relative to what? This EPI paper does a good job of addressing the case for Wisconsin. It uses a wage equation to adjust our salaries for inputs such as age, education and experience, etc. It also correctly adjusts our salaries for the fact that public employees work fewer hours (on average), but it is missing some things, like the fact that our jobs are generally more secure. Given that public employees generally have increased job security (although that doesn’t look to be the case in the next budget) one would expect a lower salary. The conclusion of the paper:

On an annual basis, full-time state and local employees and school employees are under-compensated by 8.2% in Wisconsin, in comparison to otherwise similar private-sector workers. When comparisons are made for differences in annual hours worked, the gap remains, albeit at a smaller percentage of 4.8%.…Furthermore, average annual total compensation for a full-time worker without a high school education is 14% greater in state and local government ($36,935) than in the private sector ($32,415). High school graduates approach earnings and compensation equivalency between the private and public sector.

So, some workers appear to be overpaid, based on the wage equations and some underpaid. On average, we are underpaid. But as I said, we probably should be a little underpaid.

A former student sends me this cato paper which talks about public sector unions and the rising cost of employee compensation. I don’t have time to dig in to the national trends on unions and public sector employment now, but I will comment on unions below. I did want to include the reading for future reference.

In terms of the rest of the proposal I have two comments, first on Walker’s tactics as the relate to the budget, and second on collective bargaining and unions.

I think Walker’s tactics are ill thought out. In the case of high speed rail, not only did he give back 810 million to the feds (which by the way was not remitted to WI tax payers but spent elsewhere, like CA), but that maneuver also cost us money, since we were committed to some expenditures that were covered by the 810 million, that we can not get out of. I am not a fan of highspeed rail. But I’m less of a fan of returning money to the Feds. As they say when you are hungry, you eat what is given to you. He did the same thing with 23 million in broadband money from the Feds, and who can be against improved broadband? And now this budget repair bill is likely to cost us another 47 million in federal money. I understand the argument that we should not take the money. But as I’ve said before, it is unwise to unilaterally disarm. The federal government is not reducing our taxes by the amount we give back, rather it is being spent in other states. To hand back money is foolish. Wisconsin already receives far less than its share of federal money. We get back 82 cents for every 1.00 we send to Washington. I fully understand that we have a budget issue at the federal level, but unilaterally disarming will not solve the problem. It will only make us relatively poorer. To use another metaphor it is equivalent to showing up to a gun fight, and out of principle putting the gun down. Not a bright idea. We need the politicians in Washington, Republicans and Democrats to solve the Medicare/Medicaid/Healthcare conundrum. We need them to set the priorities of the nation. They are failing. And no, the Tea Party is not offering a solution. Shooting down random spending bills is hardly a method of establishing priorities. Bowels/Simpson proposal was an attempt to start the conversation. Look at how quickly everyone fled the conversation.

On to the issue of collective bargaining. Maybe Scott Walker is a genius. The debate seems to be about collective bargaining rights, and not the 8% pay cut. Everyone has already offered to give up the benefits. Yet, the fight over collective bargaining continues. Which means this isn’t entirely about repairing this budget, but the fight over collective bargaining is really the fight about future cuts. As in the future cuts that will occur in the 11-13 budget. Walker needs to break the union in order to cut State Aids by 900 million. Now I’m not a fan of unions. I think there are millions of examples of how they do bad things (faculty example here).

That said, we should understand the role of unions. As I mentioned I am no fan of unions. But remember they are merely a monopolist (for another view see this), meant to – at times – counterbalance a monopsonist. Why do the NFL and MLB have players unions? In part they counteract the State sanctioned monopoly of the owners (at least in the case of the MLB). And in the case of the NFL it is just to counteract the monopsony power of the owners. Since local government’s educate 90% of the K-12 kids, they might be viewed as a monopsonist.

Stripping away the collective bargain rights in this fashion has unfortunately put us on a path of confrontation and contentiousness. I now have no hope that we will be able to collectively address the budget problems going forward. Rather than negotiating a smooth path to a different equilibrium we collectively bargain, we will be stuck in a political seesaw where we bounce from the Republican vision of the future to the Democrat’s vision, back and forth. The pain is in the dynamics. This increases the pain, it doesn’t reduce it. Make no mistake in 4 years we will have a Democrat in the capital and he will pull the same shenanigans to payoff the public sector employees.

I also think its enormously hypocritical to exempt the police, firefighters, and the troopers. Not only did he exempt them he requires in the budget repair bill that funding for their departments be kept at 2009 levels or above. Therefore Walker further protects them from the cuts coming to state aids.

UW Faculty have not, until recently been able to collectively bargain. Doyle gave us the right to vote on it, and there has been a large push on UW-L’s campus. Faculty have decided to go ahead with the vote, which is now guaranteed to pass. (Even many who would have voted against it might vote for it because they really hate having their rights taken away).

I am a bit offended by the tenured faculty that walk around campus claiming we need a union. They complain that we need more rights to negotiate our working conditions. I teach 9 credit hours. Other than being in the classroom for those hours and holding office hours, I have near complete autonomy over how I do my job. I can think about what I want, I can work on what I want. We set our own curriculum, we decide on our own research agendas, we hire and fire our colleagues, and provide input into the hiring or our leaders, who in the end will have very little influence on what we do. We – at least some of us – have tenure. We are the last people that need a union to bargain our work rules. We write them! We do not work in a coal mine or a steel mill, and complaining as if we do makes us sound like we are divorced from reality, and insults those union workers who do not have it as well as we do.

Thousands of jobs have disappeared as auto plants and their suppliers deal with the fractured auto industry.

The auto statistics service Cross-Sell shows the number of new vehicles registered in Wisconsin in 2009 was nearly 172,000 – down from nearly 320,000 in 2000.

Since 2000, 107 auto dealerships have closed in Wisconsin, including 56 in 2008 and 2009.

The Journal Sentinel reports state employment in auto parts manufacturing fell 44 percent from 2000 to 2009. Parts factories such as Tower Automotive and Delphi in Milwaukee and Lear and SSI in Rock County closed.